Rail 848: The scams that cost the railway dear

One of the great mysteries of the current structure of the railways is why does every piece of work, whether undertaken by train operators, Network Rail or the engineering companies cost so much. Network Rail quotes for schemes are sometimes a factor of ten more than might be expected and even the most minor routine job seems to be far higher than comparable work in other industries.

Of course, some of this is down to the particularly difficult nature of the rail industry with its requirement to keep running as much as possible and to maintain incredibly high standards of safety. However, I have always been convinced that outsourcing, with the use of contractors and numerous subcontractors, is at the root of much of the high cost of railway contracts. Network Rail and the train operators have lost the ability to manage contracts and to bear down on costs.

I have written numerous times about high level major contracts going wrong and costing millions more than expected. My frequent rants on this subject have attracted a considerable mailbag from people working in the industry who are increasingly appalled by waste of public money and by what, at times, seems almost criminal activity to fleece the railway.

My latest whistleblower, who has given me lots of accurate information in the past, reports from the other end of the scale, the routine maintenance and small repairs needed to keep the railway going. He is convinced that there is a series of scams which cost the railway dear and ultimately mean passengers pay more for their tickets and taxpayers have to cough up more of their hard earned cash to keep the railways going.

The train operator in the area where he works is being taken for a ride in several respects. The operator is responsible for station maintenance and obtains many of its supplies from a single contractor which, in turn, uses many sub contractors. The main contractor, let’s call them Number One, markets itself on the basis that it can get fantastic discounts from suppliers, sometimes up to a staggering 99 per cent. However, these discounts are rather like those in Sports Direct, reductions from a price that never really existed or was only charged briefly. For example, cable is charged at £17 32 per metre but, wow, there is a 97 per cent discount which means the price is only 52p per metre, plus an 8 per cent handling charge.  That’s very impressive until one finds out that ordinary customers can buy the same cable at just 46 per metre. Offering such obviously spurious discounts makes it easy to disguise the true cost of supplies.

It gets worse. Number One contractor actually buys a lot of material from a very big wholesaler, Number Two. Many of the prices are marked up by Number Two when they supply Number One, which ultimately enables both to benefit from overcharging the train operator. So an item that costs £200 on its list would normally be supplied at a discount – say 25 per cent – to a large purchaser making it £150. Number One’s 8 per cent handling charge brings what it should be charging for the item up to  £162. However, Number Two inflates the price to £272 plus 8 per cent  making £293.75, which amounts to 80 per cent more than should be paid. So how does Number One benefit from this – at the end of the year, Number Two provides a refund bonus to its clients of about half the extra it takes from them. As Private Eye would says, ‘doubles all round’.

The scam of buying supplies and services at inflated prices to then , by the way, is almost as old as the railways. In my book on the history of the American railroads, The Great Railway Revolution, I explain how the directors of the Union Pacific, one of the two companies building the first transcontinental, setup a construction company, Crédit Mobilier, to carry out the work at inflated prices – leaving its excessive profits to be shared between the directors.

My informant also enlightened me on a particularly perverse way that VAT works. Apparently, doing work in house is subject to VAT while contracting is VAT deductible, and therefore on the face of it cheaper. Yet, using contractors often turns out to be more expensive because of lack of supervision and the incentive to make jobs take as long as possible. As an example, it costs £100 to replace a tap washer and no job ever costs less than that. Moreover, whereas an in-house operation like BR would have ready access to supplies, now every requirement has to involve going to a wholesaler, which, he says, ‘results in more chargeable time’. There are safety implications, too, with contractors often unaware of the difference between a signal or a mains cabinet, and forcing the former open with possible dangerous consequences.

I have left off specific details of these cases, though I have copies of some of these invoices and my contact is happy to provide them to any official source prepared to investigate. He says he has alerted the train operator through its confidential call centre (which is abroad) but the company has taken no interest in his revelations.

Scams like this add up to millions of pounds of extra spending in his area, and across the network amount to tens or even hundreds of millions. It is clear that the railway lost its ability to manage costs at privatisation, and the Office of Rail and Road often refers to the inefficiencies in the system. However, because the industry is so fragmented and outsourcing so entrenched, little is done to address this issue. It is time that this changes. And to all of you in the industry who read this column, keep the information flowing to me – confidentiality guaranteed.




The railways are undervalued – official


The value of the railways to society as a whole has always been undervalued. Listen to any phone-in show about the railways and you will inevitably get people asking why their taxes are wasted on them when they never use a train. The answer, of course, is that the railways are enormously beneficial to the economy in all kinds of ways.

This is clearly shown by a new report, The Economic Contribution of Rail, from Oxford Economics commissioned by the Railway Industry Association which has become a lot more proactive recently. The study suggests that the rail industry results in a £36.4 billion addition to the economy – the proper term is now Gross Value Added or GVA – annually and associated with 600,000 jobs. Now as an economist, I am rather sceptical of these claims because the level of precision is normally rather spurious, suggesting a far more detailed understanding of the economy than the methodology really permits.

However, I have always thought that the figures used by the government rather underestimate the value of rail to the economy and this report confirms my instinct as figures produced by Oxford Economics are much greater than those used by the government. Indeed, similar analysis in government reports suggest that the industry is worth only £10.4bn annually and supports only 240,000. This discrepancy is the result of taking into account the wider rail network such as metro, and indirect impacts such as services and catering and retail at stations.

Even this report may underestimate the value of investment. The cost of a £100m scheme for example is ultimately far less to the Exchequer than the figure might imply. For example, any equipment bought is subject to 20 per cent VAT which goes straight back to government as does tax and national insurance paid by the workers. Add in the fact that these workers might otherwise be unemployed and in receipt of Job Seekers Allowance and other benefits, and the £100m might, net, be around half that. Then there is the point that one thing that is never measured is the way that railways contribute to the quality of life for many people, something which, as a society, we shockingly fail to measure.

As this report suggests, we really do need a completely new way of assessing the value of the railways generally. Moreover, to put these figures in perspective, the total GVA is far greater than that of industries such as TV and film production, mechanical machinery or even agriculture. So next time you hear someone quibble about whether the railways are worthwhile, the report gives an unequivocal answer.


Scroll to Top